Massachusetts charges three advisers with varying flavors of fraud

Massachusetts charges three advisers with varying flavors of fraud State securities cop says Bay State is ready to oversee extra advisers after switch By Liz Skinner December 14, 2011 Massachusetts securities regulators filed a trio of actions today against investment advisers who defrauded customers out of millions of dollars by investing funds differently than promised, selling worthless investments or by charging excessive fees.
These actions come as Massachusetts and other states prepare to deal with a swell in the number of advisers they monitor next year.
In one instance, an unregistered adviser in Boston defrauded 25 investors by raising more than $1.5 million from late 2007 through December 2008 that was put into a pooled investment vehicle called JBW Capital LLC. The investment was supposed to be traded using automated trading software on the Chicago Mercantile Exchange.
The adviser, John B. Wilson, however, lost more than 90% of the money in two trades he made in September 2008, the Massachusetts Securities Division alleged in its complaint. Mr. Wilson told state investigators that he had an “addiction to trading,” said regulators, who want the adviser banned for life from securities work in the state and to return his ill-gotten gains from customers.
Mr. Wilson, who the complaint said worked at Morgan Stanley Smith Barney LLC as a financial adviser between December 2010 and September 2011, could not be reached for comment.
In a second case, registered investment adviser Daniel A. McKenna collected more than $1 million from clients over 17 years by selling them “worthless” shares in his own firm, Principle Profits Asset Management, and by convincing them to loan his firm money that he never repaid, the state alleged in a complaint. The firm has more than 100 clients with $18 million in assets under management.
The third complaint alleges that registered investment adviser Sean Michael O’Brien and his firm, Andover Equity Investment Group LLC, charged “exorbitant” fees, used client money to pay personal bills, including his mortgage, and made false statements to state investigators. Mr. O’Brien charged a 15.54% management fee that should have been around the industry average of between .5% and 2%, Massachusetts securities regulators said.
Mr. O’Brien said his custodian broker-dealer “thinkorswim,” which is a division of TD Ameritrade Inc., did not question his fees, the state said. However, investigators learned that the broker-dealer actually did raise the fee issue and ended his use of its platform, according to the complaint.
“These cases are indicative of the swift and decisive action my securities division will take when we uncover investment advisers who have violated the securities laws,” said William Galvin, secretary of the commonwealth.
Mr. Galvin said the cases show Massachusetts’ securities division is ready to monitor advisers with assets between $25 million and $100 million. These midsize advisers are required by the Dodd-Frank financial reform law to move from federal to state registration by March 2012.
Massachusetts already oversees 739 RIAs and expects to have 200 more after the switch next year, according to the state.
Monitoring small- and medium-sized advisers is crucial because in many cases when there is a breach at one of these firms there may not be any assets left to return to a harmed investor, as opposed to with a larger investment firm, Mr. Galvin said in an interview.
“These cases require detailed investigations to uncover these types of violations of misrepresenting investments, self-dealing and excessive fees,” he said.
Messages left for Mr. McKenna and Mr. O’Brien seeking comment about the complaints against them were not immediately returned.